Though Turkey had at first been skeptical towards foreign investment during its first couple of decades as a republic, the country has since adopted many reforms throughout its history to ease the entry of capital from abroad.
In particular, it exhibited a total or partial caution from the foundation of the Turkish Republic in 1923 until 1950.
According to historian Bernard Lewis, Turkey’s initial ambivalence towards foreign investment can be traced to agreements with foreign countries allowing their nationals preferential treatment while doing business in the Ottoman Empire.
Since the founding of the Turkish Republic, these “capitulations” have been seen as humiliating treaties incompatible with national sovereignty.
Today, legal arrangements for foreign investment at both the national and international levels conjure up memories of this historical past.
After World War II
At the onset of World War II in the 1940s, Turkey like the rest of the world had protectionist economic policies in place, with earnest action for legislation on foreign capital starting after the war, when the Marshall Plan dominated economy and politics.
With a transfer guarantee for foreign capital, the government introduced the first regulations in 1947 and the first law on the issue was passed in 1950.
These government regulations came into force on April 22, 1947 to facilitate the entry of foreign investments. It was based on previous measures introduced in 1930 that regulated foreign currency exchange relations.
The decision sought to attract capital in the form of foreign currency and invest this in areas such as agriculture, industry, transportation infrastructure and tourism.
If the government found that foreign investment helped increase exports and was beneficial for the country’s development efforts, it would allow a portion of the profit to be transferred abroad.
Foreign investors found this decision uncertain and at the discretion of the government.
However, many foreign private-owned partnerships were established based on this legislation in 1947.
In 1948, Turkey took a major step towards a liberal economy from its statist structure as it entered the economic program hammered out by the Marshall Plan.
Turkey’s 1954 Foreign Capital Incentive Law was also an important milestone in encouraging foreign direct investment (FDI) to the country.
The law granted foreign capital the right to enter all sectors open to domestic capital and allowed investment not only in the form of liquidity but also non-objective rights such as machinery and parts, license, patent and trademark rights.
Another legislative act on FDI inflows the Petroleum Law of 1954 aimed to funnel foreign investment and technology to help oil exploration efforts.
The landmark “Jan. 24 decisions” of 1980 changed Turkey’s basic economic paradigm, paving the way for a free-market approach.
With the move, Turkey applied an outward-oriented growth model through a structural transition.
The decisions included liberalization policies, the establishment of a Foreign Capital Department with jurisdiction over all foreign capital investment and the reduction of bureaucratic red tape to streamline the entry of FDI.
According to data compiled by the Capital Board of Turkey, in 2005, FDI reached $36.9 billion and the number of foreign companies investing in the country reached 6,584.
Especially within the framework of the outward growth strategy, the foreign capital law, the reduction of bureaucracy and the application of realistic exchange rates were instrumental in this increase.
However, these investments generally focused on areas that foreigners considered profitable, such as the manufacturing and services sectors.
In the mid-80s, the economy rapidly liberalized with new laws giving non-residents the right to open foreign currency deposit accounts with the initiation of lira convertibility.
Foreign capital permits, which were $364 million in 1986, increased to $655 million in 1987 and $821 million in 1988.
Another decision adopted in August 1989 also lifted limits on foreign exchange transactions.
It also allowed banks to borrow from abroad and liberalized the import of gold.
Other milestones in Turkey’s economic liberalization was the establishment of the Istanbul Stock Exchange and the customs union with the EU, which has reinforced openness to international trade since 1996.
FDI flows into Turkey entered a period of rapid growth starting in 2000.
Full membership talks with the EU and accelerated structural reforms to improve the investment environment in the country increased its pull in terms of FDI, which peaked in 2007 with a record $22 billion in 2007.
FDI in figures
Turkey has protected its position as the second-largest recipient of FDI in West Asia — after Israel — according to the UN trade and development body’s 2019 World Investment Report.
FDI inflows stood at $12.94 billion in 2018, up from $11.48 billion in 2017.
Turkey has traditionally received the most investment from the EU, but inflows from the U.S. rose in 2018 after a two-year dip. The U.S. has since become the second-largest investor in Turkey after the Netherlands.
According to preliminary data from the Turkish Ministry of Industry and Technology, Azerbaijan was the largest investor in January-March 2019 for the first time in history.